June PMI up, but weak demand limits recovery potential

The seasonally-adjusted Absa Purchasing Managers’ Index (PMI) rose to 46.2 index points in June 2019, up from 45.4 in May 2019. “The average level for Quarter 2 of 2019 was 46.3 points, below the level recorded in Quarter 1 of 2019”, said the Bureau for Economic Research (BER) in a statement.

In contrast, available official statistics suggest that quarterly manufacturing output is set to rebound strongly in Quarter 2 after a dismal first quarter. “However, part of this rebound is driven by a normalisation in output after load shedding disrupted production earlier in the year”, explained BER.

In fact, the PMI survey suggests that underlying demand conditions remain weak, which limits the possibility of a sustained recovery in output going forward.

The index tracking expected business conditions in six months’ time declined by a significant 6.7 points after remaining unchanged in May 2019. Part of this could be owing to the reported decline in export orders in June, with the expectation of slower global growth foretelling that export demand will likely remain under pressure in the coming months.

In June, only one of the five major sub-components came in above 50 points: the index tracking supplier deliveries. This index rose to a lofty 56.9 points from 55.7 in May.

The Business Activity Index rose by 1 point in June after a 6.1-point drop in May. Excluding December 2018, the Output Index has been stuck below the neutral 50-point mark since early 2018. “This means that respondents are reporting sustained pressure on production, which is unlikely to turn around without a meaningful recovery in demand”, noted BER.

The New Sales Orders Index rose slightly in June but failed to recover the full extent of May’s losses. At 46.2 points, the index has now been below the neutral 50-point mark for five straight months. Respondents reported a notable drop in exports during the month of June. It remains to be seen whether this will be sustained. However, it is consistent with the decline in the PMIs of some of South Africa’s key export markets, including Europe. “Slower global growth is likely to weigh on South African manufacturing exports going forward”, opined BER.

The Inventories Index also increased in June after declining in the preceding two months.

The only major sub-component of the headline PMI to decline compared with May was the Employment Index. Worryingly, the Employment Index recorded its worst quarter since 2009, which does not bode well for potential job creation in the sector.

Meanwhile, purchasing prices edged higher in June after two straight declines. The uptick was likely driven by a weaker Rand exchange rate, which pushes up the cost of imported raw materials and intermediate products.

Finally, after three consecutive declines, the Purchasing Inventories Index edged up in June. However, despite the 1.8-point increase, the index remained well below the neutral 50-point mark.